Crafting and Executing Strategy The Quest for Competitive Advantage Concepts Arthur Thompson 22e - Test Bank

Crafting and Executing Strategy The Quest for Competitive Advantage Concepts Arthur Thompson 22e – Test Bank

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Crafting and Executing Strategy, 22e (Thompson)

Chapter 6 Strengthening a Company’s Competitive Position

1) Bonobos’s Guideshop store concept allows men to have a personalized shopping experience, where they can try on clothing in any size or color, and then have it delivered the next day to their home or office. This fashion retail concept is a good example of

A) an offensive strategy to leapfrog competitors by being the first adopter of next-generation technologies or being first to market with next-generation products.
B) an offensive strategy to offer an equally good or better product at a lower price.
C) an offensive strategy to seek uncharted waters and compete in blue oceans.
D) a defensive strategy to minimize the competitive advantages of rivals.
E) a defensive strategy to capture occupied territory by maneuvering around rivals.

Answer: C

Explanation: See Illustration Capsule 6.1. The principal offensive strategy options include: (1) offering an equally good or better product at a lower price; (2) leapfrogging competitors by being the first to market with next-generation technology or products; (3) pursuing continuous product innovation to draw sales and market share away from less innovative rivals; (4) pursuing disruptive product innovations to create new markets; (5) adopting and improving on the good ideas of other companies; (6) using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals; and (7) launching a preemptive strike to capture a rare opportunity or secure an industry’s limited resources. Blocking the avenues open to challengers is considered a defensive strategy.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

2) A hit-and-run or guerrilla warfare type offensive strategy

A) involves random offensive attacks used by a market leader to steal customers away from unsuspecting smaller rivals.
B) involves undertaking surprise moves to secure an advantageous position in a fast-growing and profitable market segment; usually the guerrilla signals rivals that it will use deep price cuts to defend its newly won position.
C) works best if the guerrilla is the industry’s low-cost leader.
D) involves pitting a small company’s own competitive strengths head-on against the strengths of much larger rivals.
E) involves unexpected attacks (usually by a small-to-medium size competitor) to grab sales and market share from complacent or distracted rivals.

Answer: E

Explanation: Guerrilla offensives are surprising moves that are particularly well suited to small-to-medium size challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

3) Sometimes it makes sense for a company to go on the offensive to improve its market position and business performance. The best offensives tend to incorporate the following EXCEPT

A) focusing relentlessly on building a competitive advantage.
B) applying resources where rivals are least able to defend themselves.
C) using a strategic offensive to allow the company to leverage its weaknesses to strengthen operating vulnerabilities.
D) employing the elements of surprise as opposed to doing what rivals expect and are prepared for.
E) displaying a strong bias for swift, decisive, and overwhelming actions to overpower rivals.

Answer: C

Explanation: The best offensives tend to incorporate several principles: (1) focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage, (2) applying resources where rivals are least able to defend themselves, (3) employing the element of surprise as opposed to doing what rivals expect and are prepared for, and (4) displaying a capacity for swift and decisive actions to overwhelm rivals.

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

4) Once a company has decided to employ a particular generic competitive strategy, then it must make the following additional strategic choices, except whether to

A) focus on building competitive advantages.
B) employ the element of surprise as opposed to doing what rivals expect and are prepared for.
C) display a strong bias for swift, decisive, and overwhelming actions to overpower rivals.
D) create and deploy company resources to cause rivals to defend themselves.
E) pay special attention to buyer segments that a rival is already serving.

Answer: E

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

5) Companies like Amazon, Apple, Facebook, and Google employ all but ONE of the following offensive actions to complement and supplement the choice of one of the five generic competitive strategies. Which is not an example of an offensive move?

A) focusing on building competitive advantages
B) employing the element of surprise as opposed to doing what rivals expect and are prepared for
C) pursuing a market share leadership strategy
D) displaying a strong bias for swift, decisive, and overwhelming actions to overpower
E) creating and deploying company resources to cause rivals to defend themselves

Answer: C

Explanation: The offensive moves that these four companies pursue incorporate: (1) focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage, (2) applying resources where rivals are least able to defend themselves, (3) employing the element of surprise as opposed to doing what rivals expect and are prepared for, and (4) displaying a capacity for swift and decisive actions to overwhelm rivals. Pursuing a market share leadership strategy is not among those moves.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

6) Strategic offensives should, as a general rule, be based on

A) exploiting a company’s strongest competitive assets—its most valuable resources and capabilities.
B) instigating and executing the chosen strategy efficiently and effectively.
C) scoping and scaling an organization’s internal and external situation.
D) molding an organization’s character and identity.
E) satisfying the buyer’s needs that the company seeks to meet.

Answer: A

Explanation: Strategic offensives should, as a general rule, be grounded in a company’s strategic assets and employ a company’s strengths to attack rivals in the competitive areas where they are weakest.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

7) The principal offensive strategy options include all of the following except

A) offering an equally good or better product at a lower price.
B) using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals.
C) launching a preemptive strike to secure an advantageous position that rivals are prevented or discouraged from duplicating.
D) pursuing continuous product innovation to draw sales and market share away from less innovative rivals.
E) initiating a market threat and counterattack simultaneously to effect a distraction.

Answer: E

Explanation: The principal offensive strategy options include: (1) offering an equally good or better product at a lower price; (2) leapfrogging competitors by being first to market with next-generation products; (3) pursuing continuous product innovation to draw sales and market share away from less innovative rivals; (4) pursuing disruptive product innovations to create new markets; (5) adopting and improving on the good ideas of other companies; (6) using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals; and (7) launching a preemptive strike to secure an industry’s limited resources or capture a rare opportunity.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

8) Offensive strategic moves involve all of the following except

A) leapfrogging competitors by being first to market with next-generation products.
B) using hit-and-run or guerrilla warfare tactics to grab sales and market share.
C) launching a preemptive strike to secure an advantageous position that rivals are prevented or discouraged from duplicating.
D) pursuing continuous product innovation to draw sales and market share away from rivals.
E) blocking the avenues open to challengers.

Answer: E

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

9) An offensive to yield good results can be short if

A) buyers respond immediately (to a dramatic cost-based price cut or imaginative ad campaign).
B) competition creates an appealing new product.
C) the technology needs debugging.
D) new production capacity needs to be installed.
E) consumer acceptance of an innovative product takes time.

Answer: A

Explanation: How long it takes for an offensive to yield good results varies with the competitive circumstances. It can be short if buyers respond immediately (as can occur with a dramatic cost-based price cut, an imaginative ad campaign, or a disruptive innovation).

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

10) Bumble, a digital dating site where women make the first move, specifically uses which strategic weapon in its offensive arsenal?

A) pursuing disruptive product innovations to create new markets
B) adopting and improving on the good ideas of other companies or rival firms
C) using hit-and-run guerilla warfare tactics to grab market share from distracted or complacent rivals
D) launching a preemptive strike to capture an industry’s limited resources or capture a rare opportunity
E) offering an equally good or better product at a lower price than rivals

Answer: A

Explanation: Disruptive innovation to create new markets involves perfecting a new product with a few trial users and then quickly rolling it out to the whole market in an attempt to get many buyers to embrace an altogether new and better value proposition quickly. While this strategy can be riskier and more costly than a strategy of continuous innovation, it can be a game changer if successful. Examples include online universities, Bumble (dating site where women make the first move), Venmo (digital wallet), Apple Music, CampusBookRentals, and Waymo (Alphabet’s self-driving tech company).

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

11) The worst targets for an offensive-minded company to target are

A) market leaders that are strong.
B) runner-up firms with strengths in areas where the offensive-minded challenger is weaker.
C) large multinational companies with vast capabilities and resources.
D) runner-up firms that have amassed sufficient resources and capabilities to place them on the verge of becoming market leaders.
E) other offensive-minded companies that possess a sizable war chest of cash and marketable securities.

Answer: E

Explanation: The following are the best targets for offensive attacks: (1) market leaders that are vulnerable; (2) runner-up firms that possess weaknesses in areas where the challenger is strong; (3) struggling enterprises that are on the verge of going under; and (4) small local and regional firms that possess limited capabilities and resources.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

12) Launching a preemptive strike type of offensive strategy entails

A) sapping the rival’s financial strength and competitive position.
B) weakening the rival’s resolve.
C) moving first to secure advantageous competitive assets that rivals can’t readily match or duplicate.
D) threatening the rival’s overall survival in the market.
E) using hit-and-run tactics to grab sales and market share away from complacent or distracted rivals.

Answer: C

Explanation: By definition, a preemptive strike by a challenger means moving first to secure advantageous competitive assets that rivals cannot readily match or duplicate.

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

13) A blue-ocean strategy

A) is an offensive strike employed by a market leader that is directed at pilfering customers away from unsuspecting rivals to boost profitability.
B) involves an unexpected (out-of-the-blue) preemptive strike to secure an advantageous position in a fast-growing market segment.
C) works best when a company is the industry’s low-cost leader.
D) involves abandoning efforts to beat out competitors in existing markets and instead invent a new industry or new market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand.
E) involves the use of highly creative, never-used-before strategic moves to attack the competitive weaknesses of rivals.

Answer: D

Explanation: A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that renders existing competitors irrelevant and allows a company to create and capture altogether new demand.

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

14) A good example of blue-ocean type of offensive strategy is

A) a company like EERO that leapfrogged rivals in innovation in the home Wi-Fi market.
B) a company like EasyJet that developed a cost advantage to undercut its rivals in passenger airlines
C) a company like Home Depot that adopted and improved on the good ideas of other companies.
D) a company like Australian winemaker Casella Wines that created a Yellow Tail brand designed to appeal to a wider market, one that also includes consumers of other alcoholic beverages.
E) a company like Google that plays hardball, aggressively pursuing competitive advantage and trying to reap the benefits a competitive edge offers—a leading market share, excellent profit margins, and rapid growth.

Answer: D

Explanation: Casella Wines’ Yellow Tail is prominently mentioned in the chapter as an exemplar of using a blue-ocean strategy, one that seeks to gain a dramatic and durable competitive advantage by inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand. All of the other companies mentioned have deployed offensive strategies of one kind or another, but none use a blue-ocean strategy.

Difficulty: 3 Hard

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

15) An example of a company that does not use blue-ocean market strategy is

A) eBay in the online auction industry
B) Tune Hotels in the lodging industry
C) Uber and Lyft in the ridesharing industry
D) Cirque du Soleil in the live entertainment industry
E) Walmart’s logistics and distribution in the retail industry

Answer: E

Explanation: A notable example of such blue-ocean market space is the online auction industry that eBay created and now dominates. Other companies that have created and continue to dominate blue-ocean market spaces include Cirque du Soleil, Drybar, Netjets, Uber and Lyft, and Tune Hotels.

Difficulty: 3 Hard

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

16) As general manager of a local restaurant chain, you have been asked to develop defensive moves to protect your company’s market position and restrict any challenger’s options for initiating a competitive attack. You would present all but ONE of the following strategic options to your executive team.

A) Challenge struggling runner-up restaurants that are on the verge of going under.
B) Grant volume discounts or better financing terms to dealers/distributors and provide discount coupons to customers to help discourage them from frequenting other local restaurants.
C) Signal to challengers and new entrants in the local restaurant industry that retaliation is likely in the event they launch an attack.
D) Publicly commit your restaurant chain to a policy of matching a competitor’s terms or prices or breadth of menu items.
E) Maintain a war chest of cash and/or marketable securities.

Answer: A

Explanation: Challenging struggling runner-up restaurants that are on the verge of going under is instead an example of an offensive strategy. In the fiercely competitive local restaurant market, all firms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their efforts at other rivals.

Difficulty: 3 Hard

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

17) The purposes of a defensive strategy do not include

A) increasing the risk of having to defend an attack.
B) weakening the impact of any attack that occurs.
C) pressuring challengers to aim their efforts at other rivals.
D) helping protect a competitive advantage.
E) decreasing the risk of being attacked.

Answer: A

Explanation: In a competitive market, all firms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their efforts at other rivals. While defensive strategies usually don’t enhance a firm’s competitive advantage, they can definitely help fortify the firm’s competitive position, protect its most valuable resources and capabilities from imitation, and defend whatever competitive advantage it might have.

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

18) To fend off a competitive attack, defensive-minded companies

A) remain steadfast to current product features and models to ensure resources are not diverted toward unproductive efforts.
B) avoid giving suppliers volume discounts or providing them with better financing terms from the strategic response in order to maintain current profitability levels.
C) use innovation and intellectual property protection to obtain product line exclusivity to force competitors to use other distributors.
D) void all lengthy warranties to save money.
E) avoid competitor’s clients since their loyalty will not allow them to switch.

Answer: C

Explanation: The most frequently employed approach to defending a company’s present position involves actions that restrict a challenger’s options for initiating a competitive attack. Any number of obstacles can be placed in the path of would-be challengers. A defender can introduce new features, add new models, or broaden its product line to close off gaps and vacant niches to opportunity-seeking challengers. It can thwart rivals’ efforts to attack with a lower price by maintaining its own lineup of economy-priced options. It can discourage buyers from trying competitors’ brands by lengthening warranties, making early announcements about impending new products or price changes, offering free training and support services, or providing coupons and sample giveaways to buyers most prone to experiment. It can induce potential buyers to reconsider switching. It can challenge the quality or safety of rivals’ products. Finally, a defender can grant volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers, or it can convince them to handle its product line exclusively and force competitors to use other distribution outlets.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

19) What is the goal of signaling a challenger that strong retaliation is likely in the event of an attack?

A) to alleviate their fears by committing to reduce the costs of value chain activities
B) to cause the challenger to begin the attack instead of waiting
C) to dissuade challengers from attacking or diverting them into using less-threatening options
D) to create collaborative relationships with challengers
E) to insulate other firms from adverse impacts resulting from the challenge

Answer: C

Explanation: The goal of signaling challengers that strong retaliation is likely in the event of an attack is either to dissuade challengers from attacking at all or to divert them to less-threatening options. Either goal can be achieved by letting challengers know the battle will cost more than it is worth.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

20) A signal that would not warn challengers that strong retaliation is likely is

A) publicly announcing management’s commitment to maintain market share.
B) publicly committing to a company policy of matching competitors’ terms or pricing.
C) maintaining a war chest of cash and marketable securities.
D) making a strong counter-response to the moves of weak competitors.
E) publicly announcing strong quarterly earnings potential to financial analysts.

Answer: E

Explanation: Signals to would-be challengers can be given by: publicly announcing management’s commitment to maintaining the firm’s present market share; publicly committing the company to a policy of matching competitors’ terms or prices; maintaining a war chest of cash and marketable securities; making an occasional strong counter response to the moves of weak competitors to enhance the firm’s image as a tough defender.

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

21) Tinder’s first-mover strategic thrust into the online dating industry resulted in a high payoff in all of the following except

A) pioneering rollout of the dating app on college campuses helped build up the firm’s image and reputation and created strong brand loyalty.
B) users remained strongly loyal to Tinder because of incentives and switching cost barriers.
C) learning how to use Tinder was kept proprietary.
D) moving first constituted a preemptive strike, making competitive imitation very difficult or unlikely for rivals.
E) market uncertainties made it difficult for Tinder’s founding team to ascertain whether or not the dating app would eventually succeed.

Answer: E

Explanation: See Illustration Capsule 6.2. There are five conditions in which first-mover advantages are most likely to arise: (1) when pioneering helps build a firm’s reputation and creates strong brand loyalty; (2) when a first mover’s customers will thereafter face significant switching costs; (3) when property rights protections thwart rapid imitation of the initial move; (4) when an early lead enables the first mover to move down the learning curve ahead of rivals; and (5) when a first mover can set the technical standard for the industry.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

22) Being a first mover is not particularly advantageous under which circumstance?

A) when moving first with a preemptive strike makes imitation difficult or unlikely
B) when first-time buyers remain strongly loyal to pioneering firms in making repeat purchases
C) when early commitments to new technologies, types of components, or emerging distribution channels produce an absolute cost advantage over rivals
D) when markets are slow to accept the innovative product offering of a first mover, and fast followers possess sufficient resources and marketing muscle to overtake a first mover
E) when being a pioneer helps build a firm’s image and reputation with buyers

Answer: D

Explanation: There are five such conditions in which first-mover advantages are most likely to arise: (1) when pioneering helps build a firm’s reputation and creates strong brand loyalty; (2) when a first mover’s customers will thereafter face significant switching costs; (3) when property rights protections thwart rapid imitation of the initial move; (4) when an early lead enables the first mover to move down the learning curve ahead of rivals; and (5) when a first mover can set the technical standard for the industry.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

23) First-mover disadvantages (or late-mover advantages) rarely arise when

A) the costs of pioneering are much higher than being a follower and only negligible learning/experience curve benefits accrue to the pioneer.
B) rapid market evolution gives fast followers an opening to leapfrog the pioneer with next-generation products of their own.
C) the pioneer’s products are somewhat primitive and do not live up to buyer expectations, allowing clever followers to win disenchanted buyers with better-performing products.
D) the marketplace is skeptical about the benefits of a new technology or product being pioneered by a first mover.
E) the market response is strong and the pioneer gains a monopoly position that enables it to recover its investment.

Answer: E

Explanation: In some instances, there are advantages to being an adept follower rather than a first mover. Late-mover advantages (or first-mover disadvantages) arise in five instances: (1) when the costs of pioneering are high relative to the benefits accrued and imitative followers can achieve similar benefits with far lower costs; (2) when an innovator’s products are somewhat primitive and do not live up to buyer expectations, thus allowing a follower with better-performing products to win disenchanted buyers away from the leader; (3) when rapid market evolution (due to fast-paced changes in either technology or buyer needs) gives second movers the opening to leapfrog a first mover’s products with more attractive next-version products; (4) when market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until these needs are clarified; and (5) when customer loyalty to the pioneer is low and a first mover’s skills, know-how, and actions are easily copied or even surpassed.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

24) Late-mover advantages (or first-mover disadvantages) are not likely to arise when

A) the costs of pioneering are much higher than being a follower and only negligible learning/experience benefits accrue to the pioneer.
B) the marketplace is skeptical about the benefits of a new technology or product being pioneered by a first mover.
C) the pioneer’s products are somewhat primitive and are easily bested by late movers.
D) opportunities exist for a blue-ocean strategy to invent a new industry or distinctive market segment that creates altogether new demand.
E) technological change is rapid, and fast-following rivals find it easy to leapfrog the pioneer with next-generation products of their own.

Answer: D

Explanation: In some instances, there are advantages to being an adept follower rather than a first mover. Late-mover advantages (or first-mover disadvantages) arise in five instances: (1) when the costs of pioneering are high relative to the benefits accrued, and imitative followers can achieve similar benefits with far lower costs; (2) when an innovator’s products are somewhat primitive and do not live up to buyer expectations, thus allowing a follower with better-performing products to win disenchanted buyers away from the leader; (3) when rapid market evolution (due to fast-paced changes in either technology or buyer needs) gives second movers the opening to leapfrog a first mover’s products with more attractive next-version products; (4) when market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until these needs are clarified; and (5) when customer loyalty to the pioneer is low, and a first mover’s skills, know-how, and actions are easily copied or even surpassed.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

25) First-mover advantages are unlikely to be present when

A) pioneering helps build a firm’s image and reputation with buyers.
B) rapid market evolution (due to fast-paced changes in technology or buyer preferences) presents opportunities to leapfrog a first-mover’s products with more attractive next-version products.
C) early commitments to new technologies, new-style components, new or emerging distribution channels, and so on, can produce an absolute cost advantage over rivals.
D) moving first can constitute a preemptive strike, making imitation extra hard or unlikely.
E) first-time customers remain strongly loyal to pioneering firms in making repeat purchases.

Answer: B

Explanation: When rapid market evolution occurs, often involving furious technological change or product innovation, a first mover may become vulnerable to next-generation technologies or next-generation products. Markets can be slow to accept the innovative product offering of a first mover, in which event a fast follower with substantial resources and marketing muscle is able to “leapfrog” the first mover.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

26) Because the timing of a strategic move can be just as important as the choice of move to make, a company’s best option with respect to timing of an action is

A) to be the first mover.
B) to be a fast follower.
C) to be a late mover (because it is cheaper and easier to imitate the successful moves of the leaders and moving late allows a company to avoid the mistakes and costs associated with trying to be a pioneer—first-mover disadvantages usually overwhelm first-mover advantages).
D) to be the last mover—playing catch-up is usually fairly easy and almost always is much cheaper than any other option.
E) to carefully weigh the first-mover advantages against the first-mover disadvantages and act accordingly.

Answer: E

Explanation: Because the timing of strategic moves can be consequential, it is important for company strategists to be aware of the nature of first-mover advantages and disadvantages and the conditions favoring each type of move.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

27) The race among rivals for industry leadership is more likely to be a marathon rather than a sprint when

A) new industry or market segments are yet to be developed and create altogether new consumer demand.
B) fast followers find it easy to leapfrog the pioneer with even better next-generation products of their own.
C) the market depends on the development of complementary products or services that are currently not available, buyers have high switching costs, and influential rivals are in position to derail the efforts of a first mover.
D) entry barriers are high, substitute products or services are readily available, and buyers are prone to negotiate aggressively for better terms and lower prices.
E) there are nearly always big advantages to being a slow mover rather than an early mover, especially in regard to avoiding the “mistakes” of first or early movers.

Answer: C

Explanation: Any company that seeks competitive advantage by being a first mover thus needs to ask some hard questions: Does market takeoff depend on the development of complementary products or services that currently are not available? Is new infrastructure required before buyer demand can surge? Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs in moving to the newly introduced product or service? Are there influential competitors in a position to delay or derail the efforts of a first mover? When the answers to any of these questions are yes, then a company must be careful not to pour too many resources into getting ahead of the market opportunity—the race is likely going to be closer to a 10-year marathon than a 2-year sprint.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

28) For every emerging opportunity, there exists a(n)

A) market penetration curve, and this typically has an inflection point where the business model falls into place.
B) opportunity to achieve first-mover status, which depends on analyzing the competitive status curve where all the potential rivals are encoded.
C) emerging pitfall that is a counterpoint to the intended growth.
D) normal curve scenario which signifies the average growth curve will be opportunistic.
E) intense competition that constrains the company’s prospects for rapid growth and superior profitability.

Answer: A

Explanation: The lesson here is that there is a market penetration curve for every emerging opportunity. Typically, the curve has an inflection point at which all the pieces of the business model fall into place, buyer demand explodes, and the market takes off.

Difficulty: 2 Medium

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

29) Market conditions and factors that tend not to favor first movers include

A) buyer behavior that is readily attracted to new technology or product features.
B) conditions that make imitation difficult and absolute cost advantages that accrue to those who make early commitments to new technologies, components, or distribution channels.
C) quick market penetration and strong loyalty among first-time customers.
D) growth in demand that depends on the development of complementary products or services that are not currently available and new-industry infrastructure that is needed before buyer demand can surge.
E) pouring too few resources into getting ahead of the market opportunity.

Answer: D

Explanation: In situations when rapid market evolution including growth in demand occurs (due to fast-paced changes in either technology or buyer needs and expectations), fast followers and maybe even cautious late movers have an opening to leapfrog a first mover’s products with more attractive next-version or even complementary products.

Difficulty: 3 Hard

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

30) What does the scope of the firm refer to?

A) the range of activities the firm performs externally and its social responsibility activities
B) to gain competitive advantage based on where it locates its various value chain activities
C) the firm’s capability to employ vertical integration strategies
D) the range of activities the firm performs internally and the breadth of its product offerings, the extent of its geographic market, and its mix of businesses
E) to prevent foreign competition from affecting the market

Answer: D

Explanation: The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.

Difficulty: 1 Easy

Topic: Value Chain Analysis

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

31) ________ is the range of product and service segments that the firm serves within its market.

A) Horizontal scope
B) Vertical integration
C) Vertical scope
D) Product outsourcing
E) Joint venture partnership

Answer: A

Explanation: Several dimensions of firm scope have relevance for business-level strategy in terms of their capacity to strengthen a company’s position in a given market. These include the firm’s horizontal scope, which is the range of product and service segments that the firm serves within its product or service market.

Difficulty: 1 Easy

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

32) ________ is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system.

A) Horizontal scale
B) Vertical scope
C) Outsourcing scope
D) Cooperative scaled scope
E) Focal scope

Answer: B

Explanation: Vertical scope is the extent to which the firm engages in the various activities that make up the industry’s entire value chain system, from initial activities such as raw-material production all the way to retailing and after-sale service activities.

Difficulty: 1 Easy

Topic: Value Chain Analysis

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

33) The difference between a merger and an acquisition is that

A) a merger involves one company purchasing the assets of another company with cash, whereas an acquisition involves a company acquiring another company by buying all of the shares of its common stock.
B) a merger is the combining of two or more companies into a single corporate entity, whereas an acquisition involves one company (the acquirer) purchasing and absorbing the operations of another company (the acquired).
C) in a merger, the companies retain their original names, whereas in an acquisition the name of the company being acquired is changed to be the name of the acquiring company.
D) a merger is a combination of three or more companies, whereas an acquisition is a pooling of interests of just two companies.
E) a merger involves two or more companies deciding to adopt the same strategy, whereas an acquisition involves one company taking over the strategy-making function of another company.

Answer: B

Explanation: A merger is the combining of two or more companies into a single corporate entity, with the newly created company often taking on a new name. An acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired.

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

34) The difference between a merger and an acquisition relates to

A) strategy and competitive advantage.
B) the presence of available resources and competitive capabilities.
C) whether the end result is related to horizontal or vertical scope.
D) creating a more cost-efficient operation out of the combined companies.
E) the details of ownership, management control, and the financial arrangements.

Answer: E

Explanation: The difference between a merger and an acquisition relates more to the details of ownership, management control, and financial arrangements than to strategy and competitive advantage.

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

35) A strategic objective that is highly UNLIKELY to drive a mergers and acquisition strategy is

A) to gain quick access to new technologies or other resources and capabilities.
B) to create a more cost-efficient operation out of the combined companies.
C) to expand a company’s geographic coverage.
D) to facilitate a company’s shift from a broad differentiation strategy to a focused differentiation strategy.
E) to extend a company’s business into new product categories.

Answer: D

Explanation: Merger and acquisition strategies typically set sights on achieving any of five objectives: (1) creating a more cost-efficient operation out of the combined companies; (2) expanding a company’s geographic coverage; (3) extending the company’s business into new product categories; (4) gaining quick access to new technologies or other resources and capabilities; and (5) leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

36) In the face of strong competition from Amazon, Walmart’s 2016 acquisition of Jet. com was driven by a strategic objective, such as

A) expanding its geographic coverage or extending its business into new product categories.
B) reducing the number of industry key success factors.
C) reducing the number of strategic groups in the industry.
D) facilitating its shift from a low-cost leadership strategy to a focused low-cost strategy.
E) lengthening its value chain and thereby putting it in a better position to deliver superior value to buyers.

Answer: A

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

37) Merger and acquisition strategies

A) are nearly always superior alternatives to forming alliances or partnerships with these same companies.
B) may offer considerable cost-saving opportunities and can also be beneficial in helping a company try to invent a new industry.
C) are a particularly effective way of pursuing a blue-ocean strategy and an outsourcing strategy.
D) seldom are superior alternatives to forming alliances with these same companies because of the financial drain of using the company’s cash resources to accomplish the merger or acquisition.
E) are one of the best ways for helping a company strongly differentiate its product offering and use a differentiation strategy to strengthen its market position.

Answer: B

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

38) Choose the intended outcome that did not happen with Expedia’s merger and acquisition of HomeAway, Inc.

A) Expedia’s geographic coverage expanded.
B) Expedia was provided with quick access to new technologies or complementary resources and capabilities.
C) Expedia was able to lead the convergence of the travel and vacation rental industries, whose boundaries are being blurred by changing technologies and new market opportunities.
D) Expedia’s business extended into new product categories.
E) Expedia suppressed its rival company Orbitz’s breakthroughs in management or technology.

Answer: E

Difficulty: 3 Hard

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

39) Mergers and acquisitions

A) are nearly always successful in achieving their desired purpose.
B) frequently do not produce the hoped-for outcomes.
C) are generally less effective than forming alliances or partnerships with these same companies.
D) are highly risky because of the financial drain that comes from using the company’s cash resources to pay for the costs of the merger or acquisition.
E) are usually more successful in achieving cost reductions than in expanding a company’s market opportunities.

Answer: B

Explanation: Despite many successes, mergers and acquisitions do not always produce the hoped-for outcomes. Cost savings may prove smaller than expected. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. Efforts to mesh the corporate cultures can stall due to formidable resistance from organization members. Key employees at the acquired company can quickly become disenchanted and leave; the morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. Differences in management styles and operating procedures can prove hard to resolve. In addition, the managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave alone and which activities to meld into their own operations and systems.

Difficulty: 1 Easy

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

40) A primary reason why mergers and acquisitions sometimes fail is due to the

A) misinterpretation of the cultural differences, like employee disenchantment and low morale, differences in management styles and operating procedures, and operations integration decision mistakes.
B) execution of functional and integration activity, while sustaining and capitalizing on the combined sources of revenue.
C) development of effective integration plans conducive to employee satisfaction.
D) advertising message detailing the merger announcement.
E) creation of management-employee programs in order to foster better communication.

Answer: A

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

41) Why do mergers and acquisitions sometimes fail to produce anticipated results?

A) The hoped for outcomes and changes to existing operations may not eventuate.
B) Cost savings are equal or better than expected.
C) Gains in competitive capabilities quickly materialize.
D) Efforts to mesh corporate cultures go smoothly.
E) Key employees at the acquired company can quickly become disenchanted and leave.

Answer: E

Explanation: Merger and acquisition strategies typically set sights on achieving any of five objectives: (1) extending the company’s business into new product categories; (2) creating a more cost-efficient operation out of the combined companies; (3) expanding a company’s geographic coverage; (4) gaining quick access to new technologies or complementary resources and capabilities; and (5) leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. However, despite many successes, mergers and acquisitions do not always produce the hoped-for outcomes. This is because: (1) cost savings may prove smaller than expected; (2) gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize; (3) efforts to mesh the corporate cultures can stall due to formidable resistance from organization members; (4) key employees at the acquired company can quickly become disenchanted and leave; (5) the morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes; (6) differences in management styles and operating procedures can prove hard to resolve; and (7) managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave alone and which activities to meld into their own operations and systems.

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

42) Vertical integration strategies

A) extend a company’s competitive scope within the same industry by expanding its operations across multiple segments or stages of the industry value chain.
B) are one of the best strategic options for helping companies win the race for global market leadership.
C) offer good potential to expand a company’s lineup of products and services.
D) are particularly effective in boosting a company’s ability to expand into additional geographic markets, particularly the markets of foreign countries.
E) are a good strategy option for helping a company revamp its value chain and bypass low value-added activities.

Answer: A

Explanation: Vertical integration strategy can expand the firm’s range of activities backward into sources of supply and/or forward toward end users. A firm can pursue vertical integration by starting its own operations in other stages of the vertical activity chain or by acquiring a company already performing the activities it wants to bring in-house.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

43) The best reason for investing company resources in vertical integration (either forward or backward) is to

A) expand into foreign markets and/or control more of the industry value chain.
B) broaden the firm’s product line and/or avoid the need for outsourcing.
C) gain a first-mover advantage over rivals in revamping the industry value chain.
D) add materially to a company’s technological capabilities, strengthen the company’s competitive position, and/or boost its profitability.
E) achieve product differentiation and/or lengthen the company’s value chain to include more activities performed in-house and thereby gain a greater ability to reduce internal operating costs.

Answer: D

Explanation: Under the right conditions, a vertical integration strategy can add materially to a company’s technological capabilities, strengthen the firm’s competitive position, and boost its profitability. But it is important to keep in mind that vertical integration has no real payoff strategy-wise or profit-wise unless the extra investment can be justified by compensating improvements in company costs, differentiation, or competitive strength.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

44) A good example of vertical integration is a

A) global public accounting firm acquiring a small local or regional public accounting firm.
B) large supermarket chain getting into convenience food stores.
C) crude oil refiner purchasing a firm engaged in drilling and exploring for oil.
D) hospital opening up a nursing home for the aged.
E) railroad company acquiring a trucking company specializing in long-haul freight.

Answer: C

Explanation: Vertical integration strategies can aim at full integration (participating in all stages of the vertical chain) or partial integration (building positions in selected stages of the vertical chain). Firms can also engage in tapered integration strategies, which involve a mix of in-house and outsourced activity in any given stage of the vertical chain. Oil companies, for instance, supply their refineries with oil from their own wells as well as with oil that they purchase from other producers—they engage in tapered backward integration.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

45) A vertical integration strategy can expand the firm’s range of activities

A) backward into sources of supply and/or forward toward end users.
B) backward into other industry business lines and/or forward to suppliers of raw materials.
C) to enable the supply chain the opportunity for expansion.
D) to complement the industry’s horizontal value chain line of profitability.
E) to establish full integration by participating in a tapered integration (without the outsourced and in-house activities).

Answer: A

Explanation: A vertical integration strategy can expand the firm’s range of activities backward into sources of supply and/or forward toward end users.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

46) The two most compelling reasons for a company to pursue vertical integration (either forward or backward) are to

A) strengthen the company’s competitive position and/or boost its profitability.
B) achieve product differentiation and/or lengthen the company’s value chain to include more activities performed in-house and thereby gain greater ability to reduce internal operating costs.
C) broaden the firm’s product line and/or avoid the need for outsourcing.
D) expand into foreign markets and/or control more of the industry value chain.
E) enable use of offensive strategies and/or gain a first-mover advantage over rivals in revamping the industry value chain.

Answer: A

Explanation: The two best reasons for investing company resources in vertical integration are to strengthen the firm’s competitive position and/or to boost its profitability. Vertical integration has no real payoff unless it produces sufficient cost savings to justify the extra investment, adds materially to a company’s technological and competitive strengths, and/or helps differentiate the company’s product offering.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

47) For backward vertical integration into the business of suppliers to be a viable and profitable strategy, a company

A) must first be a proficient manufacturer.
B) must be able to achieve the same scale economies as outside suppliers and match or beat suppliers’ production efficiency with no drop-off in quality.
C) must have excess production capacity so that it has an ample in-house ability to undertake additional production activities.
D) needs to have a wide product line, so it can supply parts and components for many products.
E) should have a distinctive competence in production process technology and at least a core competence in manufacturing R&D.

Answer: B

Explanation: For backward integration to be a cost-saving and profitable strategy, a company must be able to (1) achieve the same scale economies as outside suppliers and (2) match or beat suppliers’ production efficiency with no drop-off in quality.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

48) The hallmarks of Tesla’s vertical integration strategy do not include

A) investments in a “gigafactory” that manufactures the batteries that are essential for a long-lasting Tesla electric vehicle.
B) research and development and rapid deployments of Tesla’s control integration systems (creating control factors across its entire value chain).
C) in-house manufacturing of key components and new parts that require frequent updates resulting in a shorter learning curve and more rapid new Tesla vehicle development
D) fostering closer relationships between Tesla engineering and manufacturing departments to provide greater control over product design.
E) a network of dealerships that allows Tesla to sell directly to consumers and handle maintenance needs without relying on third parties that sometimes have competing priorities

Answer: B

Explanation: See Illustration Capsule 6.4. All of the above collectively except for the development and deployment of control integration are among the objectives of Tesla’s vertical integration strategy. Unlike many vehicle manufacturers, Tesla embraces vertical integration from component manufacturing all the way through vehicle sales and servicing. In order to drive innovation in a critical part of its supply chain, Tesla has invested in a “gigafactory” that manufactures the batteries that are essential for a long-lasting electric vehicle. According to Tesla’s former VP of Production, in-house manufacturing of key components and new parts that require frequent updates has enabled the company to learn quickly and launch new versions faster. Moreover, having closer relationships between engineering and manufacturing gives Tesla greater control over product design. Tesla uses forward vertical integration to improve the customer experience by owning the distribution and servicing of the vehicles it builds. Their network of dealerships allows Tesla to sell directly to consumers and handle maintenance needs without relying on third parties that sometimes have competing priorities.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

49) The potential advantages of Tesla’s backward vertical integration strategy include

A) increased vulnerability to Tesla from powerful suppliers (who may be inclined to raise prices at every opportunity).
B) moderately increased risks to Tesla of disruptions in obtaining crucial components or support services.
C) reduced costs.
D) increased business risk for Tesla because it can control a larger portion of the overall industry value chain.
E) enhancement of Tesla’s differentiation capabilities and perhaps achieving a differentiation-based competitive advantage.

Answer: E

Explanation: See Illustration Capsule 6.4. Backward vertical integration can produce a differentiation-based competitive advantage for a company like Tesla since performing activities internally contributes to a better-quality product or service offering, improves the caliber of customer service, or in other ways enhances the performance of the final product. Tesla is a good example of how a company’s integration into more stages along the industry value chain system can add to a company’s differentiation capabilities by allowing it to strengthen its core competencies, better master key skills or strategy-critical technologies, or add features that deliver greater customer value.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

50) Backward vertical integration can produce a

A) full integration when activities remain the domain of key suppliers.
B) tapered integration if the firm consolidates all activities in-house.
C) differentiation-based competitive advantage when activities enhance the performance of the final product.
D) focused differentiation strategy when the market is broad and the product is a commodity.
E) lower degree of flexibility in accommodating shifting buyer preferences.

Answer: C

Explanation: Backward vertical integration can produce a differentiation-based competitive advantage when performing activities internally contributes to a better-quality product or service offering, improves the caliber of customer service, or in other ways enhances the performance of the final product. On occasion, integrating into more stages along the industry value chain system can add to a company’s differentiation capabilities by allowing it to strengthen its core competencies, better master key skills or strategy-critical technologies, or add features that deliver greater customer value.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

51) The strategic impetus for forward vertical integration is to

A) gain better access to end users and better market visibility.
B) achieve the same scale economies as wholesale distributors and/or retail dealers.
C) control price at the retail level.
D) bypass distributors and dealers and sell direct to consumers at the company’s website.
E) build a core competence in mass merchandising.

Answer: A

Explanation: Like backward integration, forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users, improve market visibility, and include the end user’s purchasing experience as a differentiating feature.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

52) The strategic impetus for Tesla’s forward vertical integration into dealerships and charging stations is

A) being able to control the wholesale/retail portion of the automobile industry value chain.
B) experiencing fewer disruptions in the delivery of the company’s vehicles to end users.
C) gaining better access to Tesla’s end users and better market visibility.
D) broadening Tesla’s product line.
E) providing Tesla with access to resources and capabilities to achieve greater economies of scale.

Answer: C

Explanation: See Illustration Capsule 6.4. Tesla uses forward vertical integration to improve the customer experience by owning the distribution and servicing of the vehicles it builds. Their network of dealerships allows Tesla to sell directly to consumers and handle maintenance needs without relying on third parties that sometimes have competing priorities. Beyond vertically integrating the manufacture and distribution of their electric vehicles, Tesla uses the strategy to build the ecosystem that is necessary to support further adoption of their vehicles. As many consumers perceive electric cars to have limited range and long charging times that prevent long-distance travel, Tesla is building a network of Supercharger stations to overcome this pain point. By investing in this development themselves, Tesla does not need to wait for another company to deliver the critical infrastructure that drivers demand before they switch from traditional gasoline-powered cars. Similarly, Tesla sells solar power generation and storage products that make it easier for customers to make the switch to transportation powered by sustainable energy. Additionally, forward vertical integration can allow manufacturers like Tesla to gain better access to end users, improve its market visibility, and include the end user’s purchasing experience as a differentiating feature.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

53) A strategic disadvantage of vertical integration is

A) to boost a firm’s capital investment in the industry, thus increasing business risk if the industry becomes unattractive later.
B) to impair a company’s operating flexibility when it comes to changing out the use of certain parts and components.
C) to impair a company’s flexibility in accommodating shifting buyer preferences.
D) to require radically different skills and business capabilities than the firm possesses.
E) to speed up the company’s adoption of technological advances.

Answer: C

Explanation: Vertical integration has some substantial drawbacks beyond the potential for channel conflict. The most serious drawbacks to vertical integration include the following concerns: slow to embrace technological advances; less flexibility in accommodating shifting buyer preferences; may not enable a company to realize economies of scale; capacity-matching problems; and, calls for developing new types of resources and capabilities.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

54) The best example of forward vertical integration is

A) Amazon Studios and Netflix Originals that produce high-quality original content for their digital streaming services.
B) Harley-Davidson and Ducati’s own-branded stores that sell motorcycles and related memorabilia.
C) Spanish clothing maker Inditex’s textile design and manufacturing capabilities for its Zara brand.
D) Apple Inc.’s advanced semiconductor design and manufacturing capabilities for its iPhones.
E) International Paper’s investments into pulp mills near its paper mills.

Answer: B

Explanation: All of the above except Harley-Davidson and Ducati are examples of backward integration.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

55) Bypassing regular wholesale/retail channels in favor of direct sales and Internet retailing can have appeal if it

A) reinforces the brand, enhances consumer satisfaction, and results in lower prices to end users.
B) can result in better coordination of the firm’s direct sales activity to wholesalers and distributors.
C) can establish a retail frontal attack while efficiently managing its backward (defensive) sales orientation.
D) combines the best of all sales channels and provides financial support to distribution allies.
E) creates a channel conflict, thereby providing competitive improvisation.

Answer: A

Explanation: Bypassing regular wholesale and retail channels in favor of direct sales and Internet retailing can have appeal if it reinforces the brand and enhances consumer satisfaction or if it lowers distribution costs, produces a relative cost advantage over certain rivals, and results in lower selling prices to end users.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

56) A strategy of vertical integration can have substantial drawbacks, including

A) whether horizontal integration can limit the performance of strategy-critical activities in ways that increase cost, build expertise, protect proprietary know-how, or increase differentiation.
B) raising the firm’s capital investment in the industry and increasing business risk, as well as providing less flexibility in accommodating shifting buyer preferences by locking the firm into relying on its own in-house activities.
C) the environmental costs of coordinating operations across vertical chain activities.
D) loss of technological know-how.
E) the difficulties faced in entering outside vertical and horizontal markets.

Answer: C

Explanation: The tip of the scales depends on (1) whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation, (2) what impact vertical integration will have on investment costs, flexibility, and response times, (3) what administrative costs will be incurred by coordinating operations across more vertical chain activities, and (4) how difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

57) For a backward vertical integration strategy into the business of suppliers to be viable and profitable, a company must possess

A) the capability to achieve the same scale economies as outside suppliers and also match or beat suppliers’ production efficiency with no drop in quality.
B) considerable expertise in supply chain management, transportation logistics, and inventory control techniques.
C) large state-of-the-art production facilities so that it can fully capture all economies of scale in producing parts and components.
D) a distinctive competence in production process technology and at least a core competence in manufacturing R&D.
E) excess production capacity so that it has an ample in-house ability to undertake additional production activities.

Answer: A

Explanation: Backward vertical integration works best in situations where: (1) suppliers have very large profit margins, (2) the item being supplied is a major cost component, and/or (3) the requisite technological skills are easily mastered or acquired. Backward integration has no payoff unless it produces sufficient cost savings to justify the extra investment, adds materially to a company’s technological and competitive strengths, and/or helps differentiate the company’s product offering.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

58) An outsourcing strategy

A) is nearly always a more attractive strategic option than merger and acquisition strategies.
B) carries the substantial risk of raising a company’s costs.
C) carries the substantial risk of making a company overly dependent on its suppliers.
D) increases a company’s risk exposure to changing technology and/or changing buyer preferences.
E) involves farming out certain value chain activities presently performed in-house to outside vendors.

Answer: E

Explanation: Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors.

Difficulty: 1 Easy

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

59) The two big drivers of outsourcing are

A) an increased ability to cut R&D expenses and an increased ability to avoid the problems of strategic alliances.
B) that outsiders can often perform certain activities better or more cheaply, and outsourcing allows a firm to focus its entire energies on those activities that are at the center of its expertise (its core competencies).
C) a desire to reduce the company’s investment in fixed assets and the need to narrow the scope of the company’s in-house competencies and competitive capabilities.
D) the ability to avoid capital investments that accompany vertical integration and a desire to reduce the company’s risk exposure to changing technology and/or changing buyer preferences.
E) that a smaller in-house workforce and a low investment in intellectual capital will produce cost savings.

Answer: B

Explanation: Outsourcing certain value chain activities makes strategic sense whenever (1) an activity can be performed better or more cheaply by outside specialists; (2) the activity is not crucial to the firm’s ability to achieve sustainable competitive advantage; (3) the outsourcing improves organizational flexibility and speeds time to market; (4) it reduces the company’s risk exposure to changing technology and buyer preferences; and (5) it allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

60) Outsourcing strategies

A) are nearly always a more attractive strategic option than merger and acquisition strategies.
B) carry the substantial risk of raising a company’s costs.
C) carry the substantial risk of making a company overly dependent on its suppliers.
D) increase a company’s risk exposure to changing technology and/or changing buyer preferences.
E) involve farming out value chain activities presently performed in-house to outside specialists and strategic allies.

Answer: E

Explanation: Outsourcing involves contracting out certain value chain activities to outside specialists and strategic allies.

Difficulty: 1 Easy

Topic: Strategy Analysis

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

61) The following are good examples of outsourcing some value chain activities that were formerly performed in-house except

A) IBM performs information technology services for Colgate-Palmolive.
B) Luxottica manufactures glasses for Dolce & Gabbana.
C) Nordstrom retails certain products for Coach Inc.
D) Foxconn manufactures the iPad and iPhone for Apple Inc.
E) Paychex performs HR services for Robert Half Financial & Accounting.

Answer: C

Explanation: Outsourcing certain value chain activities for all of the companies listed above except Coach, Inc., which is merely using a third-party distribution channel for some of its products, makes strategic sense whenever (1) an activity can be performed better or more cheaply by outside specialists; (2) the activity is not crucial to the firm’s ability to achieve sustainable competitive advantage; (3) the outsourcing improves organizational flexibility and speeds time to market; (4) it reduces the company’s risk exposure to changing technology and buyer preferences; and (5) it allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

62) Why might a company not choose to outsource certain value chain activities presently performed in-house?

A) because it streamlines company operations in ways that improve organizational flexibility and cuts the time it takes to get new products into the marketplace
B) because it allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best
C) because it helps the company assemble diverse kinds of expertise speedily and efficiently
D) because it enables a company to gain better access to end users and better market visibility
E) because it improves a company’s ability to innovate

Answer: D

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

63) What might be considered to be a major drawback of employing an outsourcing strategy?

A) It allows a company to concentrate on its core business, leverage its key resources and core competencies, and do even better what it already does best.
B) It can hollow out a firm’s own capabilities and cause it to lose touch with activities and expertise that contribute fundamentally to the firm’s competitiveness and market success.
C) It reduces the company’s risk exposure to changing technology and/or buyer preferences.
D) It improves organizational flexibility and speeds time to market.
E) It involves an activity that can be performed better or more cheaply by outside specialists.

Answer: B

Explanation: The key benefits of outsourcing include: (1) an activity can be performed better or more cheaply by outside specialists; (2) said activity is not crucial to the firm’s ability to achieve sustainable competitive advantage and won’t hollow out its capabilities, core competencies, or technical know-how; (3) it improves organizational flexibility and speeds time to market; (4) it reduces the company’s risk exposure to changing technology and/or buyer preferences; (5) it allows a company to concentrate on its core business, leverage its key resources and core competencies, and do even better what it already does best. Hollowing out a firm’s own capabilities and causing it to lose touch with activities and expertise that contribute fundamentally to the firm’s competitiveness and market success is a drawback to outsourcing, not a benefit.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

64) Relying on outsiders to perform certain value chain activities offers such strategic advantages as

A) ensuring more costly components or services.
B) improving the company’s inability to innovate by allying with “best-in-class” suppliers.
C) reducing the company’s risk exposure to changing technology and/or changing buyer preferences.
D) increasing the firm’s inability to assemble diverse kinds of expertise speedily and efficiently.
E) reducing its information technology and operational costs so that organizational flexibility is maintained.

Answer: C

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

65) Outsourcing strategies can offer such advantages as

A) increasing a company’s ability to strongly differentiate its product and be successful with either a broad differentiation strategy or a focused differentiation strategy.
B) obtaining higher quality and/or cheaper components or services, improving a company’s ability to innovate, and reducing its risk exposure.
C) speeding a company’s entry into foreign markets.
D) permitting greater use of strategic alliances and collaborative partnerships.
E) giving a firm more direct control over the costs of value chain activities.

Answer: B

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

66) The big risk of employing an outsourcing strategy is

A) causing the company to become partially integrated instead of being fully integrated.
B) hollowing out a firm’s own capabilities and losing touch with activities and expertise that contribute fundamentally to the firm’s competitiveness and market success.
C) hurting a company’s R&D capability.
D) putting the company in the position of being a late mover instead of an early mover.
E) increasing the firm’s risk exposure to both supply chain management failures and shifts in the composition of the industry value chain.

Answer: B

Explanation: The biggest danger of outsourcing is that a company will farm out the wrong types of activities and thereby hollow out its own capabilities.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

67) Strategic alliances are

A) the cheapest means of developing new technologies and getting new products to market quickly.
B) collaborative formal arrangements where two or more companies join forces and agree to work cooperatively toward some strategically relevant objective.
C) a proven means of reducing the costs of performing value chain activities.
D) best used to insulate a company from the impact of the five competitive forces.
E) the best way to help insulate a firm from the adverse impacts of industry driving forces.

Answer: B

Explanation: A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

Difficulty: 1 Easy

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

68) A formal agreement, or ________, is between two or more separate companies in which they agree to work cooperatively toward some common objective.

A) joint venture
B) vertical integration
C) strategic alliance
D) forward integration
E) outsourcing

Answer: C

Explanation: A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

Difficulty: 1 Easy

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

69) Under which circumstance can an alliance be considered just a convenient business arrangement rather than “strategic”?

A) The alliance is critical to the company’s achievement of an important objective.
B) The alliance helps block a competitive threat.
C) The alliance helps open up important new market opportunities.
D) The alliance helps build, enhance, or sustain a core competence or competitive advantage.
E) The alliance helps the company obtain additional financing on better credit terms.

Answer: E

Explanation: An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: it facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability); it helps build, strengthen, or sustain a core competence or competitive advantage; it helps remedy an important resource deficiency or competitive weakness; it helps defend against a competitive threat, or mitigates a significant risk to a company’s business; it increases bargaining power over suppliers or buyers; it helps open up important new market opportunities; and, it speeds the development of new technologies and/or product innovations.

Difficulty: 2 Medium

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

70) Daimler’s 2017 agreement with automotive supplier Robert Bosch GmbH to develop self-driving taxis that customers can hail with a smartphone app is called a

A) joint venture.
B) joint liability company.
C) partnership.
D) dual proprietorship.
E) double-S corporation.

Answer: A

Explanation: A joint venture entails forming a new corporate entity that is jointly owned by two or more companies that agree to share in the revenues, expenses, and control of the newly formed entity.

Difficulty: 1 Easy

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

71) Entering into strategic alliances and collaborative partnerships can be competitively valuable because

A) working closely with outsiders is essential in developing new technologies and new products in virtually every industry.
B) cooperative arrangements with other companies are very helpful in racing against rivals to build a strong global presence and/or racing to seize opportunities on the frontiers of advancing technology.
C) they represent highly effective ways to achieve low-cost leadership and capture first-mover advantages.
D) they are a powerful way for companies to build loyalty and goodwill among customers with diverse needs and expectations.
E) they are quite effective in helping a company transfer the risks of threatening external developments to other companies.

Answer: B

Explanation: Companies are employing strategic alliances and partnerships to extend their scope of operations via international expansion. It lowers investment costs and risks in comparison to going it alone. Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries).

Difficulty: 2 Medium

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

72) Microsoft’s alliance with immuno-sequencing company Adaptive Biotechnologies can be called “strategic” because it serves all of the following strategic purposes except

A) builds, sustains, or enhances Microsoft’s core competence in artificial intelligence.
B) blocks a competitive threat from Amazon to become a healthcare industry player.
C) accelerates drug development and bring new therapies to patients sooner than if each party had “gone it alone.”
D) opens up important new healthcare market opportunities for both alliance members.
E) contracts out certain value chain activities by both parties to outside vendors.

Answer: E

Difficulty: 3 Hard

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

73) The best strategic alliances

A) are highly selective, focusing on particular value chain activities and on obtaining a particular competitive benefit.
B) are those whose purpose is to create an industry key success factor.
C) are those that help a company move quickly from one strategic group to another.
D) involve joining forces in R&D to develop new technologies cheaper than a company could develop the technology on its own.
E) aim at raising an industry’s barriers to entry.

Answer: A

Explanation: The best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. They enable a firm to build on its strengths and to learn.

Difficulty: 1 Easy

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

74) What might not be considered as a strategically beneficial reason why a company may enter into strategic partnerships or cooperative arrangements with key suppliers, distributors, or makers of complementary products?

A) to improve access to new markets
B) to expedite the development of promising new technologies or products
C) to enable greater opportunities for employee advancement
D) to improve supply chain efficiency
E) to overcome disadvantages of small production volumes that limit scale economies and low production costs

Answer: C

Explanation: Strategic partnerships or cooperative arrangements: facilitate achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability); help build, strengthen, or sustain a core competence or competitive advantage; help remedy an important resource deficiency or competitive weakness; help defend against a competitive threat, or mitigate a significant risk to a company’s business; increase bargaining power over suppliers or buyers; help open up important new market opportunities; and, speed the development of new technologies and/or product innovations.

Difficulty: 2 Medium

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

75) Companies racing against rivals for global market leadership need strategic alliances and collaborative partnerships with companies in foreign countries to

A) combat the bargaining power of foreign suppliers and help defend against the competitive threat of substitute products produced by foreign rivals.
B) help raise needed financial capital from foreign banks and use the brand names of their partners to make sales to foreign buyers.
C) get into critical country markets quickly, gain inside knowledge about unfamiliar markets and cultures, and access valuable skills and competencies that are concentrated in particular geographic locations.
D) help wage price wars against foreign competitors.
E) exercise better control over efforts to revamp the global industry value chain.

Answer: C

Difficulty: 2 Medium

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

76) A company racing to seize opportunities on the frontiers of advancing technology often utilizes strategic alliances and collaborative partnerships to

A) discourage rival companies from merging with or acquiring the very companies that it is partnering with.
B) reduce overall business risk and raise entry barriers into the newly emerging industry.
C) help master new technologies and build new expertise and competencies, establish a stronger beachhead for participating in the target industry, and open up broader opportunities in the target industry.
D) help defeat competitors that are employing broad differentiation strategies.
E) enhance its chances of achieving global low-cost leadership.

Answer: C

Explanation: Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

77) Carlos, the CEO of a local HR recruiting and staffing company, is considering a strategic alliance with a local payroll company. What would not likely be a consideration for Carlos with respect to whether the proposed alliance could become successful and realize its intended benefits?

A) picking a good partner
B) recognizing that the alliance must benefit both sides
C) minimizing the amount of resources that the partners commit to the alliance
D) ensuring that both parties live up to their commitments
E) structuring the decision-making process so actions can be taken swiftly when needed

Answer: C

Explanation: The merits of strategic alliances and collaborative partnerships are: picking a good partner; being sensitive to cultural differences; recognizing that the alliance must benefit both sides; ensuring that both parties live up to their commitments; structuring the decision-making process so that actions can be taken swiftly when needed; managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.

Difficulty: 3 Hard

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

78) Strategic alliances are more likely to be long lasting when they involve

A) partners that respectively have considerable resource weaknesses in the marketplace.
B) partners that are not only experienced with strategic alliances, but who also routinely enter into collaborative agreements with firms in peripheral industries.
C) partners based in countries with distinctly different cultures and consumer buying habits and preferences.
D) joining forces in R&D to develop new technologies cheaper than a company could develop the technology on its own.
E) collaboration with suppliers or distribution allies, or when both parties conclude that continued collaboration is in their mutual interests.

Answer: E

Explanation: Alliances are more likely to be long lasting when: (1) they involve collaboration with partners that do not compete directly, (2) a trusting relationship has been established, and (3) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.

Difficulty: 1 Easy

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

79) If you were advising Hoffmann-LaRoche, which set up Roche Partnering to manage more than 190 alliances in the healthcare industry, what might not be a reason why some of those alliances could prove to be unstable or break apart?

A) Anticipated gains may fail to materialize for Roche Partnering due to an overly optimistic view of the synergies.
B) Anticipated gains for Roche Partnering may fail to materialize due to a poor fit in terms of the combination of resources and capabilities.
C) One or more of the 190 partners in Roche Partnering could gain access to another company’s proprietary knowledge base, technologies, or trade secrets.
D) The partners may disagree among themselves over how to divide the profits gained from joint collaboration.
E) There is a risk for any or all of the 190 partners in Roche Partnering to become overly dependent on other companies within the partnership.

Answer: D

Explanation: There are several pitfalls to collaborative arrangements like Roche Partnering. The greatest danger is that a particular partner will gain access to another partner’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match one or more of the other 190 partners’ core strengths, thus costing another company its hard-won competitive advantage.

Difficulty: 3 Hard

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

80) Experience indicates that strategic alliances

A) are generally successful.
B) work well in cooperatively developing new technologies and new products but seldom work well in promoting greater supply chain efficiency.
C) work best when they are aimed at achieving a mutually beneficial competitive advantage for the allies.
D) can suffer culture clash and integration problems due to different management styles and business practices.
E) are rarely useful in helping a company win the race for global industry leadership.

Answer: D

Explanation: Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge.

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

81) The Achilles’ heel (or biggest disadvantage/pitfall) of relying heavily on alliances and cooperative strategies is

A) that partners will not fully cooperate or share all they know, preferring instead to guard their most valuable information and protect their more valuable know-how.
B) becoming dependent on other companies for essential expertise and capabilities.
C) the added time and extra expenses associated with engaging in collaborative efforts.
D) having to compromise the company’s own priorities and strategies in reaching agreements with partners.
E) the collaborative arrangements will not live up to expectations.

Answer: B

Explanation: When outsourcing is conducted via alliances, there is no less risk of becoming dependent on other companies for essential expertise and capabilities—indeed, this may be the Achilles’ heel of such alliances.

Difficulty: 3 Hard

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

82) The principal advantages of strategic alliances over vertical integration or horizontal mergers/acquisitions are

A) resource pooling and risk sharing, more adaptive response capabilities, and greater speed of deployment.
B) potential profitability of the alliance and related experience-curve economics.
C) the facilitation of best practices, more production capacity, and relevant synergistic savings.
D) the transactional and relational concept of operating practices and competencies.
E) material additions to a company’s technological capabilities, strengthening of the firm’s competitive position, and boosting of its profitability.

Answer: A

Explanation: The principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold: they lower investment costs and risks for each partner by facilitating resource pooling and risk sharing; they are more flexible organizational forms and allow for a more adaptive response to changing conditions; and they are more rapidly deployed.

Difficulty: 3 Hard

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

83) A company that has greater success in managing its strategic alliance can credit all of the following, except

A) establishing strong interpersonal relationships to facilitate communication.
B) incorporating contractual safeguards.
C) making opportunities for learning a routine management process.
D) establishing a system to manage alliances in a systematic fashion.
E) creating organizational learning barriers across boundaries.

Answer: E

Explanation: Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: they create a system for managing their alliance; they build relationships with their partners and establish trust; they protect themselves from the threat of opportunism by setting up safeguards; they make commitments to their partners and see that their partners do the same; they make learning a routine part of the management process.

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

84) A company that fails to manage its strategic alliance probably has

A) incorporated contractual safeguards.
B) made opportunities for learning a routine management process.
C) created a system to manage alliances in a systematic fashion.
D) established strong interpersonal relationships and established trust.
E) refrained from making commitments to its partners and ensured they do the same.

Answer: E

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

85) Samsung Group, which includes Samsung Electronics, successfully manages an ecosystem of over 1,300 partnerships that enable productive activities from global procurement to local marketing to collaborative R&D. Samsung Group’s alliance management capability can be said to have

A) developed over time, out of effort and learning.
B) decreased the company’s knowledge assets.
C) created successful strategic alliances.
D) diminished the company’s knowledge capabilities.
E) expedited the transfer of new assets into the strategic alliance.

Answer: A

Explanation: Samsung Group’s far-flung alliance management is considered an organizational capability, much like any other. It has developed over time, out of effort, experience, and learning. For this reason, the text states, it is wise to begin slowly, with simple alliances designed to meet limited, short-term objectives.

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

86) Identify and briefly explain five types of offensive strategies.

Answer: The principal offensive strategy options include: (1) offering an equally good or better product at a lower price; (2) leapfrogging competitors by being the first to market with next-generation technology or products; (3) pursuing continuous product innovation to draw sales and market share away from less innovative rivals; (4) pursuing disruptive product innovations to create new markets; (5) adopting and improving on the good ideas of other companies; (6) using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals; and (7) launching a preemptive strike to capture a rare opportunity or secure an industry’s limited resources.

Difficulty: 2 Medium

Topic: Strategy Analysis

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

87) Strategic offensives should, as a general rule, be grounded in a company’s strategic assets and employ a company’s strengths to attack rivals. Define and discuss the term strategic assets and its significance in gaining a competitive advantage.

Answer: Strategic assets are a company’s most valuable resources and capabilities such as a better-known brand name, a more efficient production or distribution system, greater technological capability, or a superior reputation for quality. Ignoring the need to tie a strategic offensive to a company’s competitive strengths and what it does best is like going to war with a popgun—the prospects for success are dim. For instance, it is foolish for a company with relatively high costs to employ a price-cutting offensive. Likewise, it is ill advised to pursue a product innovation offensive without having proven expertise in R&D and new product development.

Difficulty: 3 Hard

Topic: Strategy Analysis

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

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88) There are a number of offensive strategy options for improving market positions using cost-based and blue-ocean type strategies. Define the terms and suggest ways in which the strategies could be operationalized.

Answer: Cost-based strategies involve lowering prices to gain market share. Lower prices can produce market share gains if competitors don’t respond with price cuts of their own and if the challenger convinces buyers that its product is just as good or better. Price-cutting offensives should be initiated only by companies that have first achieved a cost advantage. A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that renders existing competitors irrelevant and allows a company to create and capture altogether new demand. A “blue ocean” is a market space where the industry does not really exist yet, is untainted by competition, and offers wide-open opportunity for profitable and rapid growth if a company can create new demand with a new type of product offering. A terrific example of such blue-ocean market space is the online auction industry that eBay created and now dominates.

Difficulty: 3 Hard

Topic: Strategy Analysis

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Apply

AACSB: Knowledge Application

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89) What is a blue-ocean strategy, what is its appeal, and what is its drawback?

Answer: A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand. Blue-ocean strategies provide a company with a great opportunity in the short run. But they don’t guarantee a company’s long-term success, which depends more on whether a company can protect the market position it created.

Difficulty: 2 Medium

Topic: Blue Ocean Strategy

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

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90) What are the purposes of defensive strategies? Give at least two examples of defensive moves.

Answer: The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and influence challengers to aim their efforts at other rivals. Examples of defensive strategies are: (1) adding new features or models and otherwise broadening the product line to close off vacant niches and gaps to opportunity-seeking challengers; (2) thwarting the efforts of rivals to attack with lower prices by maintaining economy-priced options of its own; (3) signaling challengers that retaliation is likely in the event that they launch an attack; or (4) making early announcements about impending new products or price changes to induce potential buyers to postpone switching.

Difficulty: 2 Medium

Topic: Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

91) What are the strategic advantages of being a first-mover? Are there any strategic advantages of being a follower or late-mover?

Answer: Being first to initiate a strategic move can have a high payoff when (1) pioneering helps build a firm’s image and reputation with buyers; (2) early commitments to new technologies, new-style components, new or emerging distribution channels, and so on, can produce an absolute advantage over rivals; (3) first-time customers remain strongly loyal to pioneering firms in making repeat purchases; and (4) moving first constitutes a preemptive strike, making imitation extra hard or unlikely. In situations when rapid market evolution including growth in demand occurs (due to fast-paced changes in either technology or buyer needs and expectations), fast followers and maybe even cautious late movers have an opening to leapfrog a first mover’s products with more attractive next-version or even complementary products.

Difficulty: 2 Medium

Topic: Strategy Analysis

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

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92) Identify and briefly discuss two “best targets” for offensive attacks by companies.

Answer: Two “best targets” for offensive attacks by companies are:

Runner-up firms with weaknesses in areas where the challenger is strong. These firms are an especially attractive target when a challenger’s resources and capabilities are well suited to exploiting their weaknesses.
Struggling enterprises that are on the verge of going under. Challenging a hard-pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit from the market. In this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most.

Difficulty: 2 Medium

Topic: Strategy Analysis

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

93) Discuss why timing of strategic moves is important.

Answer: When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages or disadvantages exist. Under certain conditions, being first to initiate a strategic move can have a high payoff in the form of a competitive advantage that later movers can’t dislodge. If the market responds well to its initial move, the pioneer will benefit from a monopoly position (by virtue of being first to market) that enables it to recover its investment costs and make an attractive profit. If the firm’s pioneering move gives it a competitive advantage that can be sustained even after other firms enter the market space, its first-mover advantage will be greater still.

Difficulty: 2 Medium

Topic: Strategy Analysis

Learning Objective: 06-02 When being a first mover, fast follower, or a late mover is most advantageous.

Bloom’s: Understand

AACSB: Analytical Thinking

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94) Imagine that you are the manager of a housekeeping service. Specifically describe how you would use the concepts of (1) scope of the firm, (2) horizontal integration, and (3) vertical integration to build and achieve a competitive advantage over rival housekeeping services.

Answer: Scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. Scope decisions concern those segments of the housekeeping market that you will serve—for example, residential homes, businesses and other commercial establishments, routine cleaning vs. post-disaster remediation—decisions that can also include geographic market segments in addition to the aforementioned product and service segments.

Horizontal scope is the range of product and service segments that a firm serves within its focal market. Horizontal mergers and acquisitions, which involve combining the operations of other housekeeping firms or closely related businesses within the same product or service market, provide an effective means for firms to rapidly increase the scale and horizontal scope of their core business. Unrelated diversification into services such as landscaping, security, or disaster remediation might also be feasible.

Vertical scope is the extent to which a firm’s internal activities encompass the range of activities that comprise an industry’s entire value chain system, from raw material production to final sales and service activities. A housekeeping business might increase its vertical scope via backward integration—establishing strategic partnerships and alliances with (or possibly even creating and licensing cleaning products) manufacturers of cleaning products, or performing certain human resources functions such as recruiting, training, payroll, etc. Alternatively, a housekeeping service could integrate forward into ownership and rental of vacation homes, Airbnb establishments, etc.

Difficulty: 3 Hard

Topic: Horizontal Integration

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Apply

AACSB: Analytical Thinking

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95) Under what circumstances are mergers with or acquisitions of other companies a better solution than entering into partnerships or alliances with these companies? How do mergers and/or acquisitions contribute to enhancing a company’s position?

Answer: Merger and acquisition strategies are a better solution than a strategic alliance when it comes to: (1) extending the company’s business into new product categories; (2) creating a more cost-efficient operation out of the combined companies; (3) expanding a company’s geographic coverage; (4) gaining quick access to new technologies or complementary resources and capabilities; and (5) leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. Strategic alliances commonly stop short of formal ownership ties between the partners (although there are a few strategic alliances where one or more allies have minority ownership in certain of the other alliance members). The main benefits of these collaborative relationships is to expedite the development of promising new technologies or products, to overcome deficits in their own technical and manufacturing expertise, to bring together the personnel and expertise needed to create desirable new skill sets and capabilities, to improve supply chain efficiency, to gain economies of scale in production and/or marketing, and to acquire or improve market access through joint marketing agreements. However, strategic alliances are only temporary in nature, and all too often partners in those collaborations go their separate ways, while mergers and acquisitions are permanent.

Difficulty: 3 Hard

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

96) What are mergers and/or acquisitions? How do they contribute to enhancing a company’s position?

Answer: Mergers and acquisitions are much-used strategic options to strengthen a company’s market position. Horizontal mergers and acquisitions, which involve combining the operations of firms within the same product or service market, provide an effective means for firms to rapidly increase the scale and horizontal scope of their core business. Horizontal mergers and acquisitions can strengthen a firm’s competitiveness in five ways: (1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by reducing market rivalry, (4) by increasing the company’s bargaining power over suppliers and buyers, and (5) by enhancing its flexibility and dynamic capabilities.

Difficulty: 2 Medium

Topic: Horizontal Integration

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

97) What are the general strategic objectives of merger and acquisition strategies?

Answer: The general strategic objectives of merger and acquisition strategies are:

Creating a more cost-efficient operation out of the combined companies.
Expanding a company’s geographic coverage.
Extending the company’s business into new product categories.
Gaining quick access to new technologies or other resources and capabilities.
Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.

Difficulty: 2 Medium

Topic: Acquisitions and Mergers

Learning Objective: 06-03 The strategic benefits and risks of expanding a company’s horizontal scope through mergers and acquisitions.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

98) What are the strategic advantages of a backward vertical integration strategy?

Answer: Backward vertical integration can produce a differentiation-based competitive advantage when performing activities internally contributes to a better-quality product or service offering, improves the caliber of customer service, or in other ways enhances the performance of the final product. On occasion, integrating into more stages along the industry value chain system can add to a company’s differentiation capabilities by allowing it to strengthen its core competencies, better master key skills or strategy-critical technologies, or add features that deliver greater customer value.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

99) What are the strategic disadvantages of a backward vertical integration strategy?

Answer: It is harder than one might think to generate cost savings or improve profitability by integrating backward into activities such as the manufacture of parts and components (which could otherwise be purchased from suppliers with specialized expertise in making the parts and components). For backward integration to be a cost-saving and profitable strategy, a company must be able to (1) achieve the same scale economies as outside suppliers and (2) match or beat suppliers’ production efficiency with no drop-off in quality. Neither outcome is easily achieved. To begin with, a company’s in-house requirements are often too small to reach the optimum size for low-cost operation. Furthermore, matching the production efficiency of suppliers is fraught with problems when suppliers have considerable production experience, when the technology they employ has elements that are hard to master, and/or when substantial R&D expertise is required to develop next-version components or keep pace with advancing technology in components production.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

100) What are the strategic advantages of a forward vertical integration strategy?

Answer: Forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users, improve market visibility, and include the end user’s purchasing experience as a differentiating feature. Some producers have opted to integrate forward by selling directly to customers at the company’s website. Bypassing regular wholesale and retail channels in favor of direct sales and Internet retailing can have appeal if it reinforces the brand and enhances consumer satisfaction or if it lowers distribution costs, produces a relative cost advantage over certain rivals, and results in lower selling prices to end users.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

101) What are the strategic disadvantages of a forward vertical integration strategy?

Answer: The most serious drawbacks to vertical integration include the following concerns:

Vertical integration raises a firm’s capital investment in the industry, thereby increasing business risk.
Vertically integrated companies are often slow to embrace technological advances or more efficient production methods when they are saddled with older technology or facilities.
Vertical integration can result in less flexibility in accommodating shifting buyer preferences.
Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale.
Vertical integration poses all kinds of capacity-matching problems.
Integration forward or backward often calls for developing new types of resources and capabilities.

Difficulty: 3 Hard

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

102) What are the merits of outsourcing the performance of certain value chain activities as opposed to performing them in-house? Under what circumstances does outsourcing make good strategic sense?

Answer: Outsourcing strategies narrow the scope of a business’s operations, in terms of what activities are performed internally. A company can improve its cost position and competitiveness by performing a broader range of industry value chain activities in-house rather than having such activities performed by outside suppliers. When there are few suppliers and when the item being supplied is a major component, vertical integration can lower costs by limiting supplier power. Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottleneck problems. Furthermore, when a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value-adding activities related to this know-how is beneficial even if such activities could otherwise be performed by outsiders.

Outsourcing certain value chain activities makes strategic sense whenever:

An activity can be performed better or more cheaply by outside specialists.
The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage.
The outsourcing improves organizational flexibility and speeds time to market.
It reduces the company’s risk exposure to changing technology and buyer preferences.
It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.

Difficulty: 3 Hard

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-05 The conditions that favor farming out certain value chain activities to outside parties.

Bloom’s: Understand

AACSB: Analytical Thinking

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103) When is a strategic alliance most likely to be unsuccessful?

Answer: Strategic alliances suffer from some drawbacks. Anticipated gains may fail to materialize due to an overly optimistic view of the synergies or a poor fit in terms of the combination of resources and capabilities. When outsourcing is conducted via alliances, there is no less risk of becoming dependent on other companies for essential expertise and capabilities—indeed, this may be the Achilles’ heel of such alliances. Moreover, there are additional pitfalls to collaborative arrangements. The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage.

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

104) Why do strategic alliances often fail to measure up to expectations?

Answer: The success of an alliance depends on how well the partners work together, their capacity to respond and adapt to changing internal and external conditions, and their willingness to renegotiate the bargain if circumstances so warrant. A successful alliance requires real in-the-trenches collaboration, not merely an arm’s-length exchange of ideas. Unless partners place a high value on the contribution each brings to the alliance and the cooperative arrangement results in valuable win–win outcomes, it is doomed to fail.

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

105) Why does a company racing for global market leadership need strategic alliances?

Answer: Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems. Increasingly, companies are also employing strategic alliances and partnerships to extend their scope of operations via international expansion and diversification strategies. Strategic alliances help lower a company’s investment costs and risks in comparison to going it alone. It allows two companies to achieve jointly the global scale required for cost competitiveness.

Difficulty: 2 Medium

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

106) Why does a company racing to stake out a strong position in an industry of the future need strategic alliances?

Answer: Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries). Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.

Difficulty: 2 Medium

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

107) Identify at least three factors that can aid companies in forming a successful strategic alliance.

Answer: Three factors that can aid companies in forming a successful strategic alliance are:

Recognizing that the alliance must benefit both sides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration.
Ensuring that both parties live up to their commitments. Both parties have to deliver on their commitments for the alliance to produce the intended benefits. The division of work has to be perceived as fairly apportioned, and the caliber of the benefits received on both sides has to be perceived as adequate.
Structuring the decision-making process so that actions can be taken swiftly when needed. In many instances, the fast pace of technological and competitive changes dictates an equally fast decision-making process. If the parties get bogged down in discussions or in gaining internal approval from higher-ups, the alliance can turn into an anchor of delay and inaction.

Difficulty: 3 Hard

Topic: Issues Affecting Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

108) Identify and briefly discuss four disadvantages of a vertical integration system.

Answer: The most serious drawbacks to vertical integration include the following concerns:

Vertical integration raises a firm’s capital investment in the industry, thereby increasing business risk.
Vertically integrated companies are often slow to embrace technological advances or more efficient production methods when they are saddled with older technology or facilities. A company that obtains parts and components from outside suppliers can always shop the market for the newest, best, and cheapest parts, whereas a vertically integrated firm with older plants and technology may choose to continue making suboptimal parts rather than face the high costs of premature abandonment.
Vertical integration can result in less flexibility in accommodating shifting buyer preferences. It is one thing to design out a component made by a supplier and another to design out a component being made in-house (which can mean laying off employees and writing off the associated investment in equipment and facilities). Integrating forward or backward locks a firm into relying on its own in-house activities and sources of supply.
Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale. Small companies in particular are likely to suffer a cost disadvantage by producing in-house.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

109) What are the advantages of strategic alliances and collaborative partnerships with key suppliers?

Answer: Typically, strategic alliances involve shared financial responsibility, joint contribution of resources and capabilities, shared risk, shared control, and mutual dependence.

Advantages of a strategic alliance are:

It facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability).
It helps build, strengthen, or sustain a core competence or competitive advantage.
It helps remedy an important resource deficiency or competitive weakness.
It helps defend against a competitive threat, or mitigates a significant risk to a company’s business.
It increases bargaining power over suppliers or buyers.
It helps open up important new market opportunities.
It speeds the development of new technologies and/or product innovations.

Difficulty: 3 Hard

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

110) You are the owner of a French-Japanese fusion food truck and mobile catering company. Instead of entering into an alliance or partnership with a local restaurateur to establish a bricks-and-mortar location downtown, you decide to merge with C’est La Sushi, a regional chain of French-Japanese fusion restaurants. What are the reasons for preferring a merger to an alliance or partnership? Explain the other organizational mechanisms that are also preferable to alliances.

Answer: There are circumstances in which horizontal integration via merger and acquisition are preferable to alliances and partnering. Mergers and acquisitions are especially suited for situations in which strategic alliances or partnerships do not go far enough in providing a company with access to needed resources and capabilities. Ownership ties are more permanent than partnership ties, allowing the operations of the merger or acquisition participants to be tightly integrated and creating more in-house control and autonomy. Other organizational mechanisms are also preferable to alliances. When there is limited property rights protection for valuable know-how, companies may fear being taken advantage of by opportunistic partners.

Difficulty: 2 Medium

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Apply

AACSB: Knowledge Application; Analytical Thinking

Accessibility: Keyboard Navigation

111) What are the merits of strategic alliances and collaborative partnerships for companies racing to seize opportunities in an industry of the future? Under what circumstances do they make sense? How do they contribute to competitive advantage?

Answer: The merits of strategic alliances and collaborative partnerships are: picking a good partner; being sensitive to cultural differences; recognizing that the alliance must benefit both sides; ensuring that both parties live up to their commitments; structuring the decision-making process so that actions can be taken swiftly when needed; managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.

Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries). Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.

Difficulty: 3 Hard

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

112) Identify and briefly discuss three factors a company must consider in order to capture the benefits of engaging in strategic alliances.

Answer: In order to capture the benefits of engaging in strategic alliances a company must:

Pick a good partner. A good partner must bring complementary strengths to the relationship. To the extent that alliance members have non-overlapping strengths, there is greater potential for synergy and less potential for coordination problems and conflict. In addition, a good partner needs to share the company’s vision about the overall purpose of the alliance and to have specific goals that either match or complement those of the company. Strong partnerships also depend on good chemistry among key personnel and compatible views about how the alliance should be structured and managed.
Be sensitive to cultural differences. Cultural differences among companies can make it difficult for their personnel to work together effectively. Cultural differences can be problematic among companies from the same country, but when the partners have different national origins, the problems are often magnified. Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge.
Recognize that the alliance must benefit both sides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration.

Difficulty: 3 Hard

Topic: Strategic Alliances

Learning Objective: 06-06 How to capture the benefits and minimize the drawbacks of strategic alliances and partnerships.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

113) Identify and briefly explain what is meant by each of the following terms:

outsourcing strategy
vertical integration strategy
first-mover advantage
first-mover disadvantage
horizontal and vertical scope

Answer: Outsourcing forgoes attempts to perform certain value chain activities internally and instead farms them out to outside specialists and strategic allies. A vertical integration strategy extends a firm’s competitive and operating scope within the same industry, expanding the firm’s range of value chain activities backward into sources of supply and/or forward toward end users. A first-mover advantage helps (1) build a firm’s image and reputation with buyers; (2) requires commitments to new technologies, new-style components, new or emerging distribution channels, and so on; (3) can produce an absolute cost advantage over rivals; (4) builds customer loyalty to pioneering firms in making repeat purchases; and (5) constitutes a preemptive strike, making imitation difficult or unlikely. First-mover disadvantages include vulnerability to fast-moving technology or rapid growth in customer demand, resulting in quickly appearing next-generation technology or products; and markets are sometimes slow to adopt the innovative product offering of a first mover, in which case a fast follower with substantial resources and marketing muscle can leapfrog the challenger. A company’s horizontal scope, i.e. the range of product and service segments it serves, can be expanded through new-business development or mergers and acquisitions of other companies in the marketplace, while vertical scope describes the extent to which a company engages in the various activities that make up the industry’s entire value chain system—from raw-material or component production all the way to retailing and after-sales service.

Difficulty: 2 Medium

Topic: Vertical Integration, Forward Vertical Integration and Backward Vertical Integration

Learning Objective: 06-04 The advantages and disadvantages of extending the company’s scope of operations via vertical integration.

Bloom’s: Understand

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

114) Your best friend is considering opening Emerald City, a canine day- and long-term care business that also performs grooming and minor veterinary services. She wants to know what is meant by hit-and-run (or guerrilla warfare) and preemptive strike offensive strategies. Explain to your friend what hit-and-run and preemptive strike offensive strategies are and then give her the circumstances in which either of these strategies will likely be most effective.

Answer: Hit-and-run (also known as guerrilla) offensives are considered to be strategic moves incorporating the element of surprise. These surprise offensives are particularly well suited to small or medium-sized challengers like Emerald City that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.

A preemptive strike by a challenger like Emerald City means moving first (and quickly) to secure advantageous competitive assets that rivals cannot readily match or duplicate. Examples of preemptive moves include: (1) securing the best distributors in a particular geographic region or country; (2) moving to obtain the most favorable site at a new interchange or intersection, near to airports and rail transportation hubs, and so on; and (3) tying up the most reliable, high-quality pet grooming and veterinary practitioners via exclusive partnerships, long-term contracts, or even acquisition.

The best targets for offensive attacks like hit-and-run or preemptive strike include: (1) market leaders that are vulnerable; (2) runner-up firms that possess weaknesses in areas where the challenger is strong; (3) struggling enterprises that are on the verge of going under; and (4) small local and regional firms that possess limited capabilities and resources — the latter of which is probably typical in the canine care industry. To be successful, neither offensive move has to totally block rivals from following or copying; it merely needs to provide the challenger — Emerald City — with a prime position that is not easily circumvented.

Difficulty: 3 Hard

Topic: Strategic Approaches to Winning a Sustainable Competitive Advantage

Learning Objective: 06-01 How and when to deploy offensive or defensive strategic moves.

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Crafting and Executing Strategy The Quest for Competitive Advantage Concepts Arthur Thompson 22e - Test Bank

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Crafting and Executing Strategy The Quest for Competitive Advantage Concepts Arthur Thompson 22e - Test Bank

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